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Payments For Leasing Bandwidth: Business Profit Or Royalties?


Payments for leasing bandwidth by Indonesian taxpayers to non-resident taxpayers who own satellites are interpreted by the Indonesian tax authority as payments of royalties that are subject to article 26 income tax. This interpretation has resulted in a dispute between a taxpayer and the tax authority.

Taxand Indonesia examines the Tax Court's decision on a dispute regarding the interpretation of payment for the lease of bandwidth to a non resident taxpayer. This particular case concerns PT XYZ an Indonesian resident corporate taxpayer who provides internet services. The taxpayer entered into a contract with Intelsat Global Ltd; the owner of the satellite, with the former being required to pay bandwidth leasing fees. As the leasee, PT XYZ did not use all of the bandwidth available from the satellite, and subsequently sold it to customers that needed it.

Based on Article 26(1)(c) of the Income Tax Law, these payments to a non-resident taxpayer (Intelsat Global Ltd) are considered as payment of royalties for the use of industrial, commercial or scientific equipment. PT XYZ rejected the assessment made by the Tax Authority and appealed to the Tax Court.

After having considered the arguments made by PT XYZ, the Tax Court was of the opinion that payment made under the bandwidth leasing agreement did not constitute royalties and was considered normal business profit of Intelsat Global Ltd so the right to tax rests with the country in which Intelsat Global Ltd is domiciled (UK). The bandwidth leasing payments were therefore not subject to article 26 income tax.

Taxand's Take

The Tax Court's verdict to go against the Tax Authority is certainly interesting. However, given that Indonesia's legal system differs from those of other Asian countries, there is no guarantee that the Tax Court's decision will actually be abided by the Tax Authority here. Nevertheless, the decision at least goes some way to providing legal certainty for multinationals in the business of leasing bandwidth to Indonesian telecommunications providers.

Your Taxand contact for further queries is:
Suryohadi Djulianto
T. +62 21 839 9919

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Taxand's Take Author